How to calculate profit in multiple transactions

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

01 January 2023

This puzzle was posted on the internet in mid-December: Kamau bought a cow for Sh80,000 and sold it for Sh125,000. Next market day, he bought it back for Sh140,000 and then sold it for Sh155,000. How much profit did he make? The variety of responses reveal the poor state of financial knowhow of many people.

The simplest way to work it out is to realise that these are two separate transactions. In the first one, the profit is Sh45,000 and, in the second one it is Sh15,000. So, the total income is 45,000 + 15,000 = Sh60,000.

Another way of solving the puzzle is to subtract total purchases from total sales. The purchases are Sh80,000 + Sh140,000 = Sh220,000; and the sales are Sh125,000 + Sh155,000 = Sh280,000. Therefore, the profit is Sh280,000 – Sh220,000 = Sh60,000. This is exactly the same answer as before.

I noted that people made two types of mistakes while trying to solve this puzzle. The first one was ignoring the middle step in the transaction. Hence, arguing that the profit is simply Sh155,000 minus Sh80,000; that is, Sh75,000 – which is wrong.

The second type of mistake was treating the second purchase of the cow as a loss-making transaction. Thus; working out the Sh60,000 profit correctly but then subtracting the Sh15,000 difference between the first selling price (Sh125,000) and the second purchase price (Sh140,000). This give an answer of Sh45,000 – which is also wrong.

This puzzle illustrates one of the reasons why so many small traders are not able to grow their businesses beyond “daily stock holding”. The math simply gets too complicated! In daily stock holding, the trader buys just enough goods to sell in one day.

Suppose he starts the day with, say Sh2,000; buys goods worth the whole amount and then sells them with, say, a 50 per cent margin. At the end of the trading day, he has Sh3,000 in his pocket. He immediately knows that he has made a profit of Sh1,000. The initial Sh2,000 is saved for tomorrow’s trading – and life goes on!

I have heard it said that the root of this low level of financial literacy is that it isn’t taught in our schools. This is simply not true. I have checked our school textbooks and these topics are covered quite comprehensively. The question then is: why are people learning what they are taught in school? That matter is far beyond the scope of this column.